Does State-Owned Enterprises’ Performance Evaluation Detect Earnings Manipulation?

Abstract

Performance evaluation systems serve as a crucial governance mechanism in enhancing operational efficiency and ensuring sustainable growth for state-owned enterprises (SOEs). Despite their significance, the effectiveness of these evaluation systems has received limited academic attention. This study examines how performance evaluations address earnings manipulation issues, focusing specifically on both accrual-based and real activity-based earnings management. Our empirical findings indicate that SOEs with higher accrual-based earnings management receive significantly lower ratings in performance evaluations. However, no significant relationship is observed between real activity-based management and performance evaluation ratings. These results suggest that while performance evaluations effectively account for accrual-based earnings manipulation, they fail to capture real activity-based earnings management. Our study emphasizes the need for a more nuanced approach to performance evaluation that not only detects accrual manipulation but also considers operational adjustments made by managers. Furthermore, these findings imply that performance evaluation committees and government regulators should integrate industry-specific expertise into the evaluation process to enhance the detection of real earnings manipulation, thereby strengthening governance tools in SOEs. This research contributes to the broader discourse on improving effectiveness in public sector performance assessments.